House-hunting without mortgage preapproval is a bit like shopping for a one-of-a-kind present and not bringing your wallet. When you find it, you’re excited but wary. What if someone else comes along and buys it? You might even stoop to taking the item and hiding it on another shelf.
Try doing that with a house.
Still, lots of home buyers, particularly those of the first-time variety, take the window-shopping approach to searching for a new abode. For a number of reasons, lenders and real estate pros say you ought to be preapproved for a mortgage before you ever start looking.
In fact, many real estate agents advise sellers not to consider offers from buyers that have not been preapproved. The reasoning is pretty simple: Sellers don’t want to take the house off the market and risk that a non-approved buyer might get rejected for a loan.
You can’t blame them, really. Ask yourself: If someone called you up and said he wanted to buy your house, but didn’t have the money yet, would you start packing?
“Preapproval is like having cash in hand,” says Chip Long, a broker with Chicago-based real estate company Erdenberg Otten Associates. “When you’re preapproved, the seller knows you can afford the house and the transaction can take place quickly.”
That can sometimes be the difference between getting your dream house, and losing it, says another local real estate pro.
“It’s a healthy (real estate) market in Chicago right now,” says Michael Kaufman, one of the principals of Chicago-based Bear Kaufman Realty Inc. “A lot of times there is more than one offer on a property. If you know, and the seller knows, that you’ve been preapproved, you can strike the mortgage contingency on the offer (sheet), and that could be the difference.
“With preapproval, the seller knows that you’re going to close, you’re going to come up with the cash and that all that needs to be done is to agree on a closing date and price,” he says.
Kristen and Kevin Crosby learned a valuable lesson about mortgage preapproval earlier this year. They had found a Bucktown loft and written an offer for slightly less than the asking price. Later, when their real estate agent told them there were multiple bidders on the loft, they upped their offer and set about trying to get preapproved for a mortgage.
“I wouldn’t say we were panicked,” Kristen says. “But you get this feeling that you’ve looked around and this is the place for you . . . and suddenly there’s competition and this urgency to get the place.”
For the next two days, the Crosbys moved quickly, calling different banks to see which would give them the quickest preapproval. When they got it, they waived the mortgage contingency on the offer, which was ultimately accepted by the seller.
“Looking back on it, we wish we had gotten preapproved,” Kristen says. “It would have saved us from having to scramble and worry about getting preapproved by a bank that we wanted to work with.”
So why doesn’t everyone get preapproved? Reasons vary, say the experts, but one especially prevalent reason is that most first-time home buyers don’t know the difference between prequalifying and preapproval, and need a professional to guide them through the process.
Part of the confusion between “prequalified” and “preapproved” stems from the fact that real estate professionals seem to use the terms interchangeably in conversation. They’ll say “prequalify” when they mean “preapprove” and vice versa.
Sure, they know what the terms mean, but it can be hard for the rest of us to keep track.
To clarify: Anybody can be prequalified. All it takes is a pencil, paper and a bit of figuring. Typically, lenders look for housing expenses (such as your mortgage) to be less than 28 percent of your monthly income. On top of that, lenders prefer that your long-term debt load–mortgage plus monthly debt payments for credit cards, student loans and the like–not exceed 36 percent of your monthly income.
If you’re computer savvy, but not much on figuring, there are hundreds of Web sites with mortgage calculators that allow you to effectively figure out how much of a loan you can afford. Check out the Tribune Homes Web site (http://chitrib.webpoint.com/home/calcaffd.htm) or The Mortgage Calculator Page (http://www.interest.com/calculators.html) operated by Elmhurst-based Mortgage Market Information Services Inc.
While punching numbers on the Web may help you assess a ballpark, it won’t give you precision nor, importantly, will it give a real estate agent or seller any peace of mind.
That’s where preapproval comes in. In a preapproval scenario, you’ll work directly with a bank or mortgage broker to get a conditional preapproval that will allow you to shop for a dream home that you know you can afford.
“It keeps you from overshopping,” says Long, of Erdenberg Otten. In addition to taking the guesswork out of the home search, you’ll also be able to guarantee an interest rate for a period of time while you house hunt.
Here’s how it works: The lender will study your credit report and whether you have savings for down payment and closing expenses, and will verify the amount of income you generate each month. The lender also will likely ask for these, and possibly other, documents:
– Paycheck stubs from the most recent 30 days;
– Copies of your W-2 tax form from the most recent two years;
– Recent statements reflecting your assets (e.g., bank accounts, stocks, pension funds);
– One year’s worth of canceled rent checks (if you’ve been renting);
– And two years’ worth of personal and federal tax returns (if you’re self-employed).
The lender or broker may ask you to write a check at this point, usually to cover the cost of a credit report. The fee, if there is one, is usually in the $35 to $50 range and almost always will be credited toward your application fee when you apply for the actual mortgage. Getting preapproval on a loan can take anywhere from 48 hours to a week.
It’s what takes place during that period that makes many home buyers nervous. Before issuing credit, lenders examine you as a credit risk by examining your credit history, the types of credit you have, and any lapses in your employment status or debt repayment.
Lenders and real estate agents agree that it’s better to deal with credit-report issues upfront, because it can reduce the stress of finding a great place and then being disappointed when credit issues slow down the process.
“A lot of funny things come up in credit reports,” Kaufman says. “If there is a problem, that’s OK, you figure out how to fix it now so you don’t have to worry about it once your heart is set on a house.”
As the Crosbys learned, being preapproved can sometimes mean the difference between getting the house of your dreams and settling on the place of your reality.
“Better safe than sorry,” Kaufman says. “I’d hate to invest three months looking at a home and then find at the last possible moment that you can’t get it. If you’re going to invest three months looking, what’s another 20 minutes?”
